3 in 4 Crypto Transactions in Unregulated Exchanges are Fake: Report

Paigambar Mohan Raj
Source: Bybit Learn

While the FTX episode remains fresh in the mind of the crypto community, NBER (National Bureau of Economic Research) has brought more attention to fake transactions in the cryptocurrency space. According to a working paper (titled “Crypto Wash Trading”), three out of four transactions in unregulated crypto exchanges are fraudulent.

For the study, the NBER looked into 29 unregulated crypto exchanges. The body concluded that on average, wash trades accounted for more than 70% of the volume. Additionally, on some exchanges, wash trading volumes went as high as 80%. As per the paper, wash trades accounted for $4.5 trillion in spot markets in Q1 2020. Moreover, wash trades made up over $1.5 trillion in derivatives markets in Q1 of 2022.

Do crypto exchanges gain from wash trading?

The researchers claim that wash trading has certain short-term rewards. According to the study, fraudulent transactions frequently affect how exchanges rank on data and analytics websites. Fake crypto transactions also have a short-term impact on the pricing of cryptocurrencies within the exchanges. The paper suggested that “70% of wash trading of total reported volume moves an exchanges rank up by 46 positions.”

NBER also found that crypto exchanges with more users and long history have fewer wash trades. Whereas less prominent exchanges benefit in the short term from wash trading.

Executives working on centralized exchanges (CEXs) have expressed their thoughts on how they may regain user confidence after the FTX collapse undermined people’s trust in CEXs. Dion Guillaume, an executive at Gate.io, believes that transparency in the management of user crypto assets has become crucial. Guillaume is also optimistic about the industry’s ability to bounce back in due course. The executive mentioned additional instances of “black swan” incidents and said that during the last decade, the crypto business has remained robust.

At press time, the global crypto market cap stood at $831 Billion, down by 0.1% in the last 24 hours.